SEC Whistleblowers Waiting For Big Payouts As Rumors Of First Award Mount


WASHINGTON -- The program to reward whistleblowers who report securities law violations has been a flashpoint for corporate anxiety ever since it made its way into the Dodd-Frank financial reform bill in 2010.

The program, run by the Securities and Exchange Commission, went into effect last August and offers whistleblowers 10 percent to 30 percent of the resulting sanctions. SEC officials say high-quality tips have been coming in ever since, at a pace of about seven per day.

But the program has yet to result in a payout.

That could all change soon. Rumors are running wild that the first payout will come any day now, and, especially if it's a big one, it could usher in a new era of increased risk for law-violating companies, increased compliance with securities laws or both.

"I think that it will be significant, because one of the ways that whistleblower programs establish trust with potential whistleblowers is when they make payments," said Jordan Thomas, a former SEC official who oversaw the creation of the whistleblower program and who now represents whistleblowers at the Labaton Sucharow law firm in New York.

"It's going to be a significant event," Thomas said. "For those few companies who have not reevaluated their internal reporting systems, this will be a wake-up call."

Gregory Keating, co-chair of Littler Mendelson's whistleblower and retaliation practice group -- which has more than 100 lawyers defending employers in that area -- told The Huffington Post that he thinks the first award is "imminent" and that it will be a big deal.

"I've been saying now for a couple of months that when the announcement of these awards starts trickling out, it's going to further fuel the fire that is already burning," Keating said.

And he doesn't mean that in a good way. "There are some lawyers who've been doing this whistleblower litigation for years," Keating said. But the new program has brought out "a whole host of new players," many from other areas of high-risk litigation, like toxic torts, and they're already "pushing the envelopes and looking for new theories of what constitutes shareholder fraud every day," he said.

The lack of payouts thus far has been a concern to plaintiffs' lawyers, said Stephen A. Weisbrod, of the Washington, D.C., law firm Weisbrod Matteis & Copley. "I think that more people are coming out of the woodwork, but whether they actually will be compensated for the huge risks that they take when they blow the whistle on their own employers remains to be seen," he said.

"Until the SEC starts awarding money to whistleblowers, it's a big question mark," said Stuart Meissner, a plaintiffs' lawyer in New York City.

Sean McKessy, who heads the SEC's new Whistleblower Office, said he understand the skepticism about the program. "I view it as already having been a very significant success, but I understand that people want to see the deliverable. And the deliverable, in our view, is paying people for good information," he said.

McKessy hardly sees himself as an obstacle to passing out the big bucks. He said he's as eager as anyone for that first payout, and many more to come.

"The more, the better, obviously. The higher the amounts, the better. I am a competitive person," he said. "I would like to have a high number and have high dollar values associated with it."

An October 2011 report by Littler Mendelson found that 96 percent of executives surveyed were either moderately or very concerned about potential whistleblower claims against their companies in light of the new program.

That was before any money went out the door.

The new rewards cover any violation of federal securities law, including market manipulation, insider trading, inadequate disclosure, fraudulent accounting and bribery of foreign government officials.

"It's hard to think of a violation of securities law that we haven't seen," McKessy said.

Insiders can be particularly helpful in providing tips about inadequate or false disclosure, he said. "If you think about what is kind of in the sweet spot for an insider to tell us, we can't know if a statement in a filing is false unless somebody who knows the facts can tell us."

But it doesn't just have to be insider information, either. The program will pay out rewards for unique and original analyses of public information that lead to successful action, he said.

According to the program's first annual report, it received 334 tips in its first seven weeks, many of those related to market manipulation, corporate disclosures, financial statements and defrauding investors.

At an average of about seven tips a day, that would be a bit over 2,000 at 10 months into the program.

And they're good tips, said McKessy. "We are encouraged by the specificity, the timeliness and the credibility of the information we're getting from the people who are submitting under the program," he said.

"We've gotten tips from in-house lawyers, former CEOs, current directors, angry spouses, people who are currently working someplace where they think there might be wrongdoing, people who are former employees," he said.

The process for claiming an award, if a tip results in a fine, involves looking through the applicable enforcement judgments (sanctions that exceeded $1 million), then filling out a claim form.

The timetable prior to a payout is a fairly lengthy one, as it allows whistleblowers 90 days to submit their claims, for instance, and another 60 days to ask the SEC to reconsider any judgment it makes. Practically speaking, it would have been almost impossible for the SEC to have issued an award this early in the program's existence.

Thomas, the former SEC official, said a lot of companies have already taken action to improve their response to whistleblowers who report problems internally. There are incentives in the new rules to take appropriate action within 120 days.

Keating, the defense lawyer, said companies need to have a response plan ready, and he likened a whistleblower complaint to a union organizing campaign.

"In my own opinion, the most important thing to do now is take a really hard look at your existing protocol for what you do when Jim Smith stands up and says, 'This place is a fraud factory.'"

Keating said what is required is a "robust, orchestrated, coordinated" approach. Then, he said, "You can help either fend off or significantly mitigate the award by showing you're committed to compliance. And instead of getting hit with a $10 million award, maybe you escape with $1 million," he said. "Or maybe nothing."

McKessy said the first award will send a strong signal.

"I think it will be an affirmation that this will not just be a paper program, that we're not just going out and making speeches," McKessy said.

And, he added, "If evildoers get chills, I'm basically fine with that."

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